M & A Law Prof Blog

Overview of Indian Takeover Regulation

Sandeep Parekh at IIM recently posted a paper that includes a short introduction to takeover regulation in India, Indian Takeover Regulation - Under Reformed and Over Modified.  Given the recent increase in cross-border transactions involving India, this paper is worth taking a look at. 

Abstract: The takeover of substantial number of shares, voting rights or control in a listed Indian company attracts the provision of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997. The regulations have been amended nearly 20 times since inception, though the amendments have mainly concentrated on areas which needed no amendment. At the same time a vast number of obvious problems have not been rectified in the regulations. The large number of amendments have also created requirement of a compulsory tender offer of such unnecessary complexity as to make it virtually unintelligible to even a well qualified professional.

This paper argues that the complexity in the trigger points for disclosure and tender offer introduced over the years lacks a philosophy, and most of the amendments can not only be deleted but a very simple structure can be introduced making compliance of the regulations straight forward and easy to understand by management of listed companies. Certain other areas which need amendments have also been discussed. Chief amongst these are the provisions relating to consolidation of holdings, conditional tender offers, hostility to hostile acquisitions, definitional oddities, payment of control premium in the guise of non compete fees, treatment of differential voting rights, treatment of Global Depository Receipts and disclosure enhancements.

This paper does not try to portray a particular combination of numbers as the best possible set of trigger points and compulsory acquisition numbers but advocates that whatever numbers are adopted should not be changed for several decades. Arguments that state that the changing economic condition requires constant changes with these numbers, it is argued is wrong.

-bjmq

Hummer Deal Finally Dies

So it's hardly a surprise to anyone paying attention that GM's deal to seller its Hummer unit to an unknown privately owned company from the interior of China died yesterday.  (GM announcement here)  GM announced that it would begin to immediately shut down Hummer and its operations.   

Though the terms of the proposed deal haven't been made public, I'm assuming the sale agreement included a customary regulatory condition to closing.  Such a condition would permit either party to refuse to close and then terminate the transaction in the event the required regulatory approvals were not obtained by the deal's drop dead date.  The way these conditions are often written, the parties can then walk away without either party paying a fee.  

However, given the importance of Chinese regulatory approval to making this deal happen and the high degree of risk that was so evident early on, the parties (or GM) would have been smarter to include a reverse termination fee tied to the Chinese buyer's failure to secure approval for the deal.  Or, at the very least, they should have considered including a "ticking fee" after the deal's first deadline passed without an approval.  Hummer was always a money losing transaction venture for GM.  The longer it kept it going in hopes of this deal closing, the more money GM lost.  We'd have all been better off if the buyer had to pay for the delay.  Of the two, the buyer was in the better position to bear the risk of China not approving the proposed deal.  Were there a fee in place, the buyer would have been forced to make a decision sooner about the likelihood of this deal going forward rather than simply let it float along and cause further damage to GM.  

In any event, this is an example of a transaction that may be sensitive from a regulatory perspective.  In such transactions, reverse termination fees or ticking fees might play a useful role in efficiently shifting onto buyers the risks of the deal collapsing.

-bjmq

Limits on Termination Fees

While Delaware does not take a brightline rule approach to limiting the size of termination fees, other do.  Last week, I referred to a paper from John Coates comparing Delaware's standards with respect to termination fees with the UK's rule-based approach.  Well, last week, the Takeovers Panel in Australia, the Takeover Panel's cousin down under adopted new guidance on termination fees (break fees), limiting their size in most circumstances to no more than 1% of equity value of a transaction. 

In its guidance on lock-up devices, the Panel also warned against the potentially anti-competitive effect of what they call no-due-diligence obligations, particularly those that provide initial bidders with information rights in the event a second bidder happens along.  I blogged about the potentially anti-competitive effects of this kind of weak-form rights of first refusal before.  Delaware, however, is clearly okay with them (see Toys R Us).

One supposes that the announcement of a brightline rule with respect to termination fees in Australia provides a nice opportunity for a natural experiment.

-bjmq

Takeover Panel to Rewrite Rules?

It seems there may be some blow-back following Kraft's takeover of Cadbury.  Lord Davies, the British Trade Minister and Cadbury's former chairman Roger Carr are suggesting that following Kraft's successful acquisition of British icon Cadbury that the Takeover Panel should make some changes to their rules to ensure this sort of thing doesn't happen again.  Specifically, they suggest:

Among its provisions is a rule that deals must be conditional on at least half of a company’s shareholders accepting the offer.   In his speech earlier this month, Carr said certain changes to the Code may be needed ‘to make hostile bids more difficult to win’. 

He suggested a ‘radical’ change to takeover rules, namely: ‘Raise the acceptance for takeovers above 50%, to dilute the risk of shortterm holders overriding the wishes of a committed longer-term shareholder base by simple majority.’   

This threshold could be lifted to 60%, he argued. Alternatively, Carr said shareholders who buy into a company during a bid could be disenfranchised.

Given that the Takeover Panel has generally taken the position that questions about the ownership of corporations should be left to the stockholders and has eschewed a Delaware-like approach that vests much more power with boards, any move to increase the relative power of boards to resist hostile tender offers is a little disappointing.   Anyway, here's hoping they don't. I like the diversity in approaches.  It gives us academics something to look at!

-bjmq

Cross-Border M&A and National Pride

This morning I opened my email to see news on two multi-billion dollar deals by Indian conglomerates.  Bloomberg reported that Reliance Industries Ltd., one of India’s largest companies and owner of the world’s largest oil-refining complex, raised its offer for bankrupt LyondellBasell Industries AF to about $14.5 billion.  In addition, India’s Bharti Airtel has been able to line up almost $9 billion in loans for its $10.5 billion bid for Zain’s African assets.  These types of large-scale deals generally receive a lot of positive popular press attention in India, some of it with nationalistic sentiments touting the rise of India Inc.  Whenever I read these stories they make me wonder about a recent paper by Ole-Kristian Hope, Wayne Thomas and Dushyantkumar Vyas, entitled “The Cost of Pride: Why do Firms from Developing Countries Bid Higher?” which examines whether companies from developing countries bid higher (relative to companies from developed countries) in their quest for international expansion and national glory.

Abstract: Using an extensive panel of cross-border M&A transactions between 1990 and 2007, we find that firms from developing countries (versus those from developed countries) bid higher on average to acquire assets in developed countries. We are interested in why these higher bids occur. We find that bids of firms from developing countries are higher in cases where the transaction displays “national pride” characteristics, where national pride is identified through a manual examination of media articles. These results, which are robust to numerous specifications (including alternative measures of national pride) and control variables, are both statistically and economically significant and highlight a source of pride beyond personal hubris which potentially influences corporate decision makers.

In my opinion, the next stage of this research is to see whether deals with national exuberance create positive wealth effects for the shareholders of the bidding companies.

-AA

PCCW Highlights Corporate Voting Problems

Here's a case out of Hong Kong that is highlighting some of the real problems associated with corporate voting.  If you think Florida is bad (apologies to Florida), then you haven't been paying attention to the deficiencies associated with corporate voting.  In the PCCW case, controlling shareholder Richard Li unsuccessfully attempted a $2.1 billion buyout of the public shareholders.  From Forbes:

Bloomberg reports that the company's offices were searched by police earlier this month, along with those of Fortis Insurance Co. (Asia), a local insurer that was once controlled by Li through his Pacific Century Regional Developments (PCRD).

Hong Kong's Securities and Futures Commission won a court ruling in April, 2009 to block Li’s bid after the regulator alleged that hundreds of people, including Fortis Asia agents, were given shares in the phone carrier to boost support for the deal.

Li, the son of Hong Kong's richest man, Li Ka-shing and a billionaire in his own right with a fortune we estimate at $1.1 billion, has not been implicated in any wrongdoing.

Although minority shareholders were vocally opposed to the transaction, it succeeded at the ballot box.  It's all still a little fizzy what was going on here.  The Hong Kong police have since raided Mr. Li's home apparently and sealed up the ballot boxes.  At this point, there is no indication that Mr. Li violated any laws.   It's an odd situation.  It's hard to imagine the police intervening in a US corporate election, but there you have it.   

While we're on the subject, Marcel Kahan and Ed Rock have a paper, The Hanging Chads of Corporate Voting, that appeared in the Georgetown Law Review a couple of years ago that's worth reading again.

-bjmq

BKS replies to Burkle

Dear Mr. Burkle:

Thanks for your letter.  If you don't like our shareholder rights plan, just vote against it when we submit to the shareholders for a vote some time in the next 12 months.  Anyway, we think you don't understand the rights plan, so we amended it to make it clearer for you.  Oh, and you can't add.

Love,

BKS Board

That's my version of the Barnes & Noble board's response to investor Ron Burkle.  You can read their version here.  The amendment to the rights plan is here.

-bjmq

K&E on "Just Say No"

According to this client memo from K&E, recent takeover battles are bringing into question the continued vitality of the “just say no” defense, which allows the board of a target company to refuse to negotiate (and waive structural defenses) to frustrate advances from unwanted suitors.

According to the authors, "just say no" is more properly viewed as a tactic rather than an end, and when viewed this way,

it is apparent that the vitality of the “just say no” defense is not and will not be the subject of a simple “yes or no” answer from the Delaware courts. Instead, the specific facts and circumstances of each case will likely determine the extent to which (and for how long) a court will countenance a target’s board continuing refusal to negotiate with, or waive structural defenses for the benefit of, a hostile suitor.

MAW

 

Termination Fees in US and UK - standards vs. rules

John Coates' new paper, M&A Break Fees: US Litigation vs. UK Regulation, takes a look at the question ex ante rules vs ex post standards with respect to break fees.  One of the numerous results worth noting was that in the US Coates observed an increase in the size of break fees (presumably as parties litigated and searched for a level that courts would accept).  In the UK on the other hand, Coates reports that break fees started near the permitted cap and stayed there.

Abstract:  This paper contrasts UK and US governance of M&A break fees to see what the contrast can teach us about trade-offs between litigation and regulation as modes of governance, including how laws change under each regime over time. Data on 1,136 bids in 1989-2008 and 61 fee disputes show: (1) the UK caps fees at a low level with a simple ex ante rule based not on regulatory expertise but on an arbitrarily chosen percentage of bid value, which nonetheless has the virtues of clarity and lower litigation costs, and enhances competition conditional on an initial bid, and (2) US courts evaluate fees ex post with a complex and vague standard, allowing for greater variation and higher average fees, reducing bid competition and increasing bid completion rates, and possibly increasing M&A overall, at the cost of legal uncertainty and litigation (although less than might be expected), in part because courts resist articulating clear rules. Laws in each nation exhibit inertia; are protected by entrenched interest groups (institutional investors in the UK, lawyers in the US); and co-exist with the opposite approach (litigation in the UK, regulation in the US), even within the domain of M&A law. Subject to strong limits on external validity, the case study suggests that interest groups may be the most important factors shaping the initial choice between regulation and litigation, even for otherwise similar nations in a similar context, and that a combination of interest groups formed in response to a given choice, as well as lawmaker incentives, may preserve those choices even after the conditions giving rise to the initial choice have passed away.

-bjmq

Russian Pre-Clearance Procedures

You might remember that the Oracle-Sun deal filed and then pulled its pre-clearance notification in Russia when it ran into difficulties with EU anti-trust authorities.  At the time, I was a little mystified.   Now, Clifford Chance is setting us all straight.  Here's their memo on the Russian merger pre-clearance process and part of their assessment of notification requirements for transactions involving a foreign buyer and seller: 

Russian competition law follows the "effects doctrine" and the notification requirements may also apply in case of foreign-to-foreign mergers.

Until August 2009, merger clearance in Russia was required if a foreign-to-foreign transaction met both of the following criteria: (1) it resulted in the acquisition of shares or assets of Russian companies, or direct or indirect control over Russian companies; and (2) it results or may result in the restriction of competition in Russia.

This structure was, however, reformed as a part of the Second Antimonopoly Package, which turned these two formerly cumulative criteria into alternative requirements. In addition, the second criterion was modified, which is expected to result in broader application of the Russian merger control rules by FAS. It is now sufficient that a transaction "affects" competition in Russia, while, previously, it was required that the transaction "restricts or may restrict" competition.

To date FAS has not issued any official clarification as to how it interprets the revised requirement. Based on its current practice, one may, however, surmise that a foreign-to-foreign transaction falls within the Russian merger control regime where the target entity directly or indirectly controls any Russian entities, owns assets located in Russia or has substantial turnover from operations in Russia

-bjmq

Joining the M&A Party

Many thanks to the M&A Law Prof Blog for inviting me to be a contributor.  A devoted reader, I am very flattered to be among such fabulous company.  Hopefully there will be much to blog about in the M&A world.  At least according to the March 2010 issue of Bloomberg Markets Magazine, a recent survey of M&A professionals indicates that almost all expect a resurgence in M&A activity in 2010.  Of course, no one expects a quick return to the dizzying heights of 2007, but hopefully 2010 will beat the dismal 2009 numbers.  Given my interest in comparative law and outbound M&A deals, I was happy to see that the Asia-Pacific region is expected to be the leading hot spot for M&A activity in 2010.  Asian companies have been quite active in cross-border M&A activity in this first quarter, see for example the recent $10.5 billion bid by Bharti Airtel, an Indian telecom company, for Zain’s African assets.  I think that these types of South-South deals, and their political/legal challenges, will continue to be a major feature of M&A news in 2010.  I'll try to keep our readers updated on the legal angles of these and other hot M&A stories.

-AA

Welcome to Afra Afsharipour

I'd like to welcome Afra Afsharipour to the M&A Law Prof blog.  Afra will be joining Michael and I as a contributing editor here at the M&A Law Prof blog.  Afra is an Acting Professor of Law (in non-UC speak, that's an Assistant Professor of Law) at UC-Davis School of Law.   At Davis, Afra teaches corporations, M&A, and antitrust.  Prior to taking up her post at Davis, Afra was a transactional attorney at Davis, Polk, & Wardell in both their NYC and Bay Area offices.  

Welcome Afra!  I left a set of spare keys under the mat for you!

-bjmq

Cross Border Acquisitions by Emerging Market Companies

Chernykh, Liebenberg, and Macias have posted a paper, Changing Direction: Cross Border Acquisitions by Emerging Market Firms, in which they analyze acquisition patterns of emerging market firms in over 3,000 transactions.  It seems that firms from countries with trade surpluses with the US are using their new found wealth to make profitable acquisitions of US (and other developed country) firms.  

Abstract:  We find a significant increase in both the number and economic size of cross-border acquisitions conducted by emerging market firms since 1990. The most dramatic turn is that the emerging market firms are becoming increasingly active in acquiring companies in developed countries. The analysis reveals two main growth patterns by emerging markets, either through mega deals (usually involving developed-market targets) or through frequent acquisition of smaller targets (usually involving emerging-market targets). Although the abnormal returns for targets acquired by emerging market firms is always positive, the magnitude more than doubles when the target is from a developed market. More importantly, emerging market acquirers also experience significant positive announcement returns when the target is from a developed market. Overall, we document that in their aim to grow globally emerging market acquirers play a significant role in cross-border acquisitions.

-bjmq

Airgas Insider Buying?

I suppose it wouldn't be a modern tender offer, I guess, unless it ended with an SEC investigation.   According to Reuters:

     But before the takeover bid was announced, a burst of activity in a few select Airgas call options occurred, fueling suspicion that the news was leaked ahead of time and was used to profit on a potential spike in Airgas' stock.

     "This does not surprise me that regulators would want to find out who was behind the heavier-than-normal call option volume on the last trading day prior to the announcement," said Henry Schwartz, president of Trade Alert. 
     "In fact, Airgas call volume started to lift on Jan. 29 and continued to be above normal all that week, suggesting that the leak, if there was one, happened about a week in advance of the proposed deal," Schwartz said.

The SEC is now investigating these trades. Of course they are.   I'm continually surprised that there remain people who think that buying options ahead of a major corporate announcement like an acquisition will go unnoticed.  Believe me, it's not all that hard to figure out.  It's called a database.  It's the same way that Walmart knows that men tend to buy beer and diapers when their wives send them shopping.   

  

-bjmq

"Just Say No" Challenge in Del.

Last week Air Products filed a suit in Delaware Chancery Court challenging Airgas' "Just Say No" defense. This has the makings of being an important case if it gets as far as a ruling.  

On the one side, we have Air Products launching a financed all-cash off for $60 (38% premium).  On the other side we have a board that is apparently uninterested in the offer and has turned it down as undervaluing Airgas. The board has a pill in place and has not opted out of DGCL Sec. 203.  The only other case we have challenging the "Just Say No" defense is Moore v Wallace (Fed Dist. Court Del).  In Moore v Wallace the Federal District Court interpreted Delaware law as permitting such a defense. The Chancery Court has never actually ruled on the issue, however.

Of course, this isn't a perfect set of facts.  It would be better if the Airgas had neither a pill nor 203 defenses in place.  As it is, the board's decision to sit on its pill and not waive 203 will likely be subject to Unocal review.  Nevertheless, this case may give the Chancery Court an opportunity to rule on the "Just Say No" defense.  Appropriately enough, Wachtell Lipton is serving as Airgas' legal counsel.

-bjmq

Tortious Interference and Pennzoil

This is a great video.  I post it because I recently had a conversation with a colleague about the Pennzoil v Texaco tortious interference with contract case.  If you're teaching this case in torts, this video is worth watching for Icahn's description (at a comedy club no less) of how the Pennzoil case got settled.   Oh, fair warning, his telling of this story is definitely rated PG-13.

-bjmq

More Galleon Scalps

Galleon takes yet another scalp.  This one from Rajiv Goel - a 1993 Wharton classmate of Raj Rajaratnam and former executive at Intel.  From the US Attorney’s Press Release announcing the guilty plea: 

Specifically, in April 2007, GOEL obtained Inside Information regarding Intel's earnings announcement for the quarter ending in March 2007 from a colleague who worked at Intel. GOEL provided this Inside Information to RAJARATNAM on Friday, April 13, 2007, at which time Galleon Tech held a short position of approximately 1,150,000 shares of Intel common stock (worth approximately $23.5 million). Intel was scheduled to announce its quarterly earnings on Tuesday, April 17, 2007.

Between April 13 and April 17, 2007, after receiving the Inside Information from GOEL, RAJARATNAM caused Galleon Tech to cover its entire short position in Intel common stock and to purchase approximately 1.72 million additional shares of Intel common stock (worth approximately $36 million). These trades changed Galleon Tech's position in Intel common stock from short approximately $23.5 million to long approximately $36 million -- a swing of approximately $59.5 million -- in the three business days preceding Intel's earnings announcement. In addition, on April 17, 2007, RAJARATNAM also caused Diversified to purchase approximately 250,000 shares of Intel common stock.

Goel also provided Rajaratnam with information related to a pending Intel joint venture.  According to the complaint from the SEC, Rajaratnam bought stock on Goel’s behalf and presumably as a payoff for the information that Goel provided.

Galleon is a continuing object lesson for a new generation of investors and Rajaratnam is fast becoming the Ivan Boeksy of this generation.  Of course, the US attorney probably got lucky here.  Without a wiretap, both of the charges against Goel could have been hard to make stick. 

First, the trading in advance of the announcement of the Intel joint venture:  Rajaratnam received the information and bought months in advance of the announcement.  That’s not the kind of thing that gets easily noticed and there are plenty ways to explain that away if pressed.

Second, the trading in advance of an earnings release.  Well, the timing of earnings releases are like the phase of the moon – they’re highly predictable.  And, when pressed it should be relatively easy for an investor like Rajaratnam to make a case that he had been following Intel for some time and could justify a purchase/sale prior to earnings.

On the other hand, if you’re going hand out inside information business school classmates about the company you’re working for, rest assured that the SEC knows where you went to school.  Also, if your business school buddy is buying shares of Hilton in your name and you’ve not sent him a check, it doesn’t take a genius to figure out what’s going on.

-bjmq

 

Canadian Insider Trading

Oh no!  Say it ain't so!  Even the Canadians are inside traders?!  I'm beginning to lose all faith in humanity...

Update:  Acquisition announcements generate predictable movements in acquirer stock. For example, post-announcement returns are typically negative for high Tobin’s q acquirers, stock transactions, and foreign targets, but positive for venture capital-backed private targets. Pre-announcement trading of acquirer stock is more likely to be attributable to insider trading when the pre-announcement price changes match the expected post-announcement acquirer returns. Based on a sample of Canadian acquirers and public and private acquisition targets from Canada, the U.S. and 31 other countries over the years 1991-2008, we find evidence consistent with insider trading of acquirer stock. This evidence, however, is limited to specific situations and is far from generalizable to all types of acquisition announcements. The evidence thereby has policy implications for the allocation of surveillance efforts for initiating insider trading investigations.

-bjmq

AG goes after BAC for securities fraud

"I didn't want to be talking [about ML's] losses through a glass wall over a telephone." BAC Treasurer to CFO Joe Price. 

No surprise then that the Attorney General's office in NY yesterday announced a civil suit under the Martin Act against Ken Lewis and Joe Price for securities fraud in connection with Bank of America's acquisition of Merrill Lynch at the height of last year's financial panic.  The AG's complaint is here. 

The basics of the complaint are that first, Ken Lewis allowed BAC shareholders to vote on the transaction, while he not disclosing that ML had incurred losses of more than $16 billion.  The AG believes that when BAC management decided not to disclose these losses to shareholders that they withheld material information.  I guess that charge was to be expected.  I mean, even ML's auditors apparently thought disclosure was warranted.  Deloitte told ML:

given the losses through what it looks like will be November when it closes, given the fact that you have another couple of billion of dollars coming down the road in goodwill impairment, we believe it’s prudent that you might want to consider filing an 8K to let the shareholders, who are voting on this transaction, know about the size of the losses to date.

“[the losses] were sizable enough [to] probably warrant disclosure. They were material subsequent events to what occurred at the end of September that would be relevant for parties that were voting …

OK, I get that argument.  Big losses, material losses have to disclosed to shareholders before they vote.  To their credit, it looks like Wachtell got cut out of the decision-making on this.  

The AG's charge that BAC used a threat to invoke the MAC misled federal regulators in order to receive $20 billion more in taxpayer funds is a little harder to make, I think.  I mean is the essence of the argument that when a party threatens to invoke a MAC to force a renegotiation that they are potentially committing securities fraud?  I suppose the essence of the AG's argument is that if ML's losses weren't material enough to disclose to BAC shareholders then they weren't material enough to support a good faith threat to invoke a MAC.  Lewis says apparently that the losses at ML really took off only after the Dec. 5 shareholder vote.  The AG argues that losses only increased by about $1.4 billion.  Hmm, I don't know.  Sounds like a jury question.

-bjmq

NBC Senate Hearings

It's probably just going to be a re-run of the morning show, but for what it's worth the Comcast-NBC Senate hearings are now underway.  Webcast here.

-bjmq